This blog is devoted to political history and opinion and its relationship to economics. I try to keep my opinions and conclusions based on logical results from data analysis. yes, even in politics there is a lot of empirical data available. In the comments, while I allow all, the only ones I find credible are those who live by the crede, 'show me your sources, and I'll show you mine" and I am not talking about biased reports from places like Fox News and MSNBC.

Tuesday, March 19, 2013

SEQUESTER, WHAT SEQUESTER?

AS MY FIRST SHOT AT A REAL BLOG on current events, I hope you don't mind if I start with the "Sequester", those nasty automatic spending cuts that were never supposed to happen because, in the end, Congress would find a way to be responsible and do what the Constitution's framers intended them to do - compromise, and come up with a solution. By now, everybody should know they "screwed the pooch", whatever that means, and allowed the Sequester to occur.

For those who don't know, the Sequester (yes, I am using it as a proper noun) required across-the-board 10% cuts in virtually every federal government program on the books. Granted, a few discretionary and most non-discretionary programs were spared, nevertheless, most of government will feel its effects; to the tune of $140 billion per year. So, what are those effects?

First, imagine what the impact would be on your household budget if you had just sustained a 10% cut in pay; this shouldn't be too hard to do if you were one of the many unlucky ones to have exactly that, or worse, happen during the Great 2008 Recession. Well, you say, the federal government's budget isn't like mine, its is full of waste, fraud, and abuse. Therefore, there is plenty of room to cut without hurting anything.

Let me suggest that it is a very rare person or family indeed that doesn't have their share of waste, fraud, and abuse (WFA) in their own household budgets, for example, cigarette smoking; alcohol consumption; driving one block instead of walking; or frequent, unnecessary trips to the store. WFA is ubiquitous in all organizations and institutions, no matter how big or how small, or whether they are public or private. That may be so, you counter, but there is a lot more of it in the federal government.

I worked as a civil servant for 20 or so years with the Department of the Air Force as a cost analyst; most of my time was spent looking at how the Air Force, and its contractors, spent money for operations and maintenance of everything from air bases to airplanes. Did I find examples of WFA? Of course I did. Was I overwhelmed by the scope of it? Nope, I wasn't; most of it was your normal run-of-the-mill waste and abuse; the big stuff, like the $2 billion JP Morgan lost through poor oversight of a trader, is pretty rare.

My point, therefore, is that the cuts the feds are going to endure will be painful and it will effect the service they deliver to the nation. How painful? You be the judge. From an article by Gen. Janet C. Wolfenbarger, Commander, Air Force Material Command (AFMC) at Wright-Patterson AFB near Dayton, OH (I spent many, many months there over the course of my career) we find her planning staff believes the following will happen between now and the end of the fiscal year in September 2013:

Defer maintenance on 297 aircraft and 197 engines at those same three bases

Reduce civilian working hours by 20%, meaning a 20% cut in pay for these folks

Elsewhere, the Navy has already cancelled 11 maintenance contracts in Norfolk, VA; in fact, the defense industry has been in decline since the third quarter of 2012 as the Defense Department started preparing for the possibility of the Sequester. Defense contractors accounted for $316 billion last year, so somewhere around $31.6 billion in cuts is going to have to come from that sector alone. Now, expand that over the rest of the Federal government, defense and non-defense, until you have reached $140 billion, and you should get an idea of what is coming.

Why haven't we seen any evidence of this yet, you might ask. and that is a very good question. Actually, there is some evidence, depending on where you live; Norfolk, VA, for example, is definitely feeling the pinch, but nationwide ... we aren't there yet. I suspect by mid-April, the news media will start reporting problems.

The reason this delay in response might be true is it won't be until mid-April when federal employees will be furloughed in large numbers. But, when it happens, it will be felt all across the country, not in just a few locations as is currently the case. The same will be true of federal contractors as well (who out-number federal employees, by the way). It will be at then, when real people start losing or cutting back real jobs, is where the economy will begin to slow because all of these people will stop spending. Even worse, the cost to tax payers goes up because unemployment benefits also begin to increase.

But, even before this occurs, the purchase of supplies and travel will stop, which is probably happening now, meaning airlines and hotels may be seeing a decline in business travelers; their main income source. However, because quarterly reports haven't been published yet, the evidence of a slow down is hidden there as well. It is rare there is anything quick about the economy because it has a huge capacity to absorb adversity and keep on ticking. It will continue to work, just less and less well, until it reaches some threshold where it collapses, like at the very end of 2008. A major question then is will the effect of the Sequester be substantial enough to drive the nation into such a recession, or will it be limited to a significant decrease in growth or maybe a few quarters of negative growth. My personal opinion is the latter case will be true.

In any case, the jury is still out on what impact the Sequester is going to have, but that shouldn't last very much longer, maybe another 30 days.